FRIDAY, MAY 23, 2008
Another Fine Holiday Mess
05/23/08 4:15 PM EST
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As of: SPX 1391 |
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Coming into this week, we were facing a number of potential negatives. From a dead canary in the coal mine in the form of the lagging banking sector, to signs of excessive speculation in the Nasdaq, to a lack of concern among options traders, we went over a number of studies suggesting weakness directly ahead.
That should have kicked off straight away on Monday, but the major indices showed unusual resilience, going on to set new highs early in the morning. That was enough to make me cry "uncle" on my short positions, which looked like the proper thing to do at the time. It was proved right, too...for all of about two hours. Later that afternoon, stocks reversed hard and we've continued lower since. My constant struggle between discipline and conviction took a bit of a hit this week.
Heading into the latter part of this week, the selling pressure was enough to trigger a few extremes among some of the shorter-term indicators we monitor, particularly on the Nasdaq 100. Our Down Pressure gauge showed us a rare form of oversold, and we were also seeing a bullish configuration in the number of Nasdaq 100 component stocks that were holding above their 50-day moving average compared to their 10-day average.
Combined with some modest positive seasonality heading into a long weekend, it looked like the indices (especially the tech-related ones) had a good chance to bounce. That started yesterday, but petered out today and in the end the NDX has slid modestly to the 1950ish area, which might be argued is technical support.
"Support" hasn't meant much the past few days. We saw the DJIA slice right through its uptrend line from the March low, and also its low from last week, with nary a pause. The S&P 500 joined the fray today, not making much of a fuss over levels that many were suspecting would contain a short-term correction.
Many of the negatives we'd been discussing coming into this week were more intermediate-term (one to three months) in nature, and this week's trading helps to confirm that those negatives are valid. When a market can't rally off of short-term oversold conditions, and ostensible support levels don't matter, then we should pay attention. That is what happened in early January, and is a sign of trend change.
I've contended since the first couple weeks of the new year that we were in the midst of a bear market, and continue to be. Many of the studies we went over in March and April suggested a rally of 5% - 10% over one to three months, and that's what we've seen - anything beyond that, most of the studies couldn't account for. So now that we've met many of those targets, remain within a bear market environment, have seen multiple signs of too much optimism coming into this week, and now have the poor market performance that stocks put in this week, the picture doesn't look too bright for the intermediate-term.
As I mentioned above, there are a few positives we could point to in the short-term, and especially if we continue to sell off early next week, I think the chances are quite good that we'll get a decent end-of-month/beginning-of-month rally into early June. But if that comes to pass, then I suspect it's going to set us up for a better opportunity to short than the one we got last week.
Have a safe and relaxing holiday weekend, and please take at least a moment in recognition of the fine men and women who sacrificed their lives so that we can worry about the market minutiae we do every day.
A Rare Downside Trend Day?
05/23/08 11:45 AM EST
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As of: SPX 1391 |
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Nothing like some selling pressure to make for another miserable holiday, which has been the market's prerogative for the past several months.
We've seen all the signs so far today for a trend day down, where a market opens at its high and closes at or near its low. Breadth on the NYSE is horrid with more than 1700 declining stocks than advancing ones, selling pressure has come in every time the NYSE TICK has dared venture above the zero line taking us to new intraday lows in the indices each time, all major sectors are participating to the downside, and we're getting only feeble bounces after the TICK approaches extreme oversold at -1000. These are much rarer days than trend days to the upside, but we'll need to see this pattern change in order to have any hope for a moderation of the selling pressure into the close.
In the process, the S&P 500 has also lost that 1380ish area that it was clinging to heading into today, and the index has violated its pattern of higher highs and higher lows, in addition to the uptrend line from March. It is also not bouncing well at all from short-term oversold conditions. All of that means that the intermediate-term trend is following through on the longer-term negatives we'd discussed heading into this week, and suggests that the next one to three months is not likely to see major, sustained gains.
It's rare to see this kind of selling pressure before a holiday, Memorial Day included. When traders have been rude enough to push the S&P 500 down 1% or more the day before a holiday, then they were just as grumpy when they returned...the index was positive the day after the holiday only 7 times out of 19 occurrences, and showed an average return of -0.7%. When it happened before Memorial Day, the S&P was up only once out of four attempts, and the average return was -1.7%.
I have not traded this market well at all this month. I was carrying a moderate-sized short position heading into Monday, but covered as the S&P made a new high that morning. It looked like the right decision as the index continue to rise, but then we got the afternoon reversal and I didn't re-institute the short. Getting back into a position after getting stopped out - if it's still a valid trading idea - is one of the hardest moves to make in trading, and I blinked, which is an amateur move and exceptionally frustrating.
I'm also now carrying a long in the NDX from yesterday morning based off the data we went over then, which again isn't looking like the best idea. I'm willing to give this one some more room, but given the stuff we went over above, I don't want see too much more weakness into early next week and get stopped out, as I continue to believe we'll get a month-end/beginning-of-month rally, especially given the selling pressure we're seeing here.
Traders Soon Heading for the Exits
05/23/08 9:55 AM EST
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As of: SPX 1391 |
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Good Friday morning...We begin the day with some weakness in the major indices as foreign markets were weak, oil is rallying and traders are fretting about some broken short-term trends. The "evil twins" of oil and gold are leading while housing, retail and banks bring up the rear, a familiar pattern on these down mornings.
Yesterday, we went over a few different gauges that showed the potential for the tech-heavy Nasdaq 100 to be oversold after the past few days of selling pressure. Given the configuration of how many stocks were in short-term downtrends versus longer-term uptrends, the Down Pressure readings, and the price pattern over the previous few days, a bounce seemed likely.
There wasn't much in that data that suggested anything other than a short-term bounce, and that's all I've been taking it for. Combined with the relatively positive seasonality we have ahead of us, that was a bit of an extra prod on the long side. The exception to that positive seasonality idea is the day after the Memorial Day holiday, which like most exchange holidays has a moderately negative tendency the day after traders return.
Heading into the first days of June, stocks have had a habit of rising, especially if buying after the post-holiday blues wore off, and especially if stocks were oversold at the time. I could find 8 other times since 1950 when the S&P was as short-term oversold as it is now, and buying the close the day after Memorial Day and holding for a week resulted in 7 winners, a +2.7% average return, and a maximum reward (+3.6%) that was three times larger than the maximum risk (-1.2%).
Several of the major indices have broken their uptrend lines from the March lows, and that is certainly getting some attention among technicians. Bulls continue to hold onto the fact that we still have a series of higher highs and higher lows in all but the DJIA, most cleanly seen in the Nasdaq 100. The recent lows are being tested here, however, and if we fail to rally soon that pattern, too, will be called into question. With broken uptrend lines and no pattern of higher highs/higher lows, the intermediate-term trend will turn neutral at best - confirming the potential troubles we had spent a good deal of time going over during the past couple of weeks.
Based on the data we discussed yesterday, I was looking for a short-term rally into the holiday, perhaps some weakness immediately thereafter, which should set up a better long-side opportunity into the end of the month. We got an initial hint of a rebound yesterday but that is being wiped out this morning. I have no intention of being aggressive with longs ahead of the holiday, as I suspect trading will be choppy with light volume, and we have the negative seasonality on Tuesday. I'll look to become more aggressive with longs if we sell off into early next week, with the expectation of an end-month, beginning of month rebound. Even if that happens, though, I still think the rally will ultimately fail as we head into a questionable intermediate-term trend.
On a side note, for those who were interested in the NYSE volume conundrum we discussed on Tuesday, see this article from Bloomberg yesterday which follows up on that topic. Basically, the article contends that using NYSE and Nasdaq volume is questionable since other trading platforms like Bats and Direct Edge have captured market share from the more-established exchanges.
All the best,
Jason Goepfert
President and CEO
Sundial Capital Research, Inc.
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